November 19, 2008

States aren’t recession-proof, but tend to fare better than most other entities — commercial or governmental. Even so things are a little tougher around the fifty right now. Moody’s singles out six states for particular trouble at the moment after being placed on its “negative outlook” — Florida, Kentucky, Nevada, Ohio, Rhode Island, and Wisconsin.

From the link

April marked the first time since December 2001 that Moody’s revised its outlook for the U.S. state-government sector to negative, and last month the ratings agency put out a new report predicting states will face harder times as the effects of the credit crisis and economic downturn continue to set in.

Already states are facing larger-than-normal budget shortfalls, which could mean, among other things, a reduction in services for residents and a greater risk of a credit rating downgrade. New York is looking at a whopping $47 billion deficit over the next four years. California is $3 billion in the hole this year. The National Conference of State Legislatures has even begun appealing for states to get their share of bailout money. (Even cash-strapped cities like Philadelphia and Phoenix are hoping for a piece of the pie.)

Yet, as bad as it looks, Moody’s predicts most states will get through this period without a serious deterioration in their credit quality.

“States are stronger in and of themselves,” said Edith Behr, vice president and senior credit officer at Moody’s. “It has everything to do with being able to reduce expenditures and increase revenues.”

These tools, like raising taxes or cutting spending, are why states generally have higher ratings than corporations. No states’ General Obligation Bonds rank below A1, which is investment grade and only four notches below the triple-A “gilt edged” ranking.

The fact that states can’t declare bankruptcy also supports their relatively strong ratings. That’s one key reason why states have a higher median rating than cities, which can file for bankruptcy protection (as Vallejo, Calif., voted to do in May). What’s good for states when it comes to easing their financial woes can also end up meaning more hardship for their cities as states push expenditures down to the local level.